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Gold 2024: protection in the face of uncertainty
09.01.2024
Macroeconomic review.
The past five years have significantly transformed the global economy, with the pandemic leading to unprecedented monetary and fiscal stimulus followed by high inflation and the sharpest monetary tightening in 40 years. The outlook for 2024 is neither bright nor bleak.
Deflation is already underway, and developed market central banks may have ended their rate hike cycles. In our opinion, a rate cut is inevitable and the easing cycle will begin. As the economy is redefined by higher interest rates, markets will not return to a period of zero rates and persistently low inflation. Instead, companies and investors will have to adapt to the new environment and:
• A risk assessment approach is required for almost all asset classes;
• Focus on duration, security and sustainable income;
• Safe-haven currencies and gold will be the current choice.
Given the great uncertainty surrounding the outlook for inflation, interest rates and global growth, diversification is especially important to manage a portfolio's risk levels. As a risk mitigation asset, gold remains the only choice in the commodities market. Among alternative assets, even if global correlations between different asset classes have recently deviated from their long-term historical trends, gold remains a useful means of diversification.
Gold has a chance to rise.
Mitigation of PrEP. Gold prices have held up well this year, given both high central bank rates and a stronger US dollar. The market has seen significant outflows from ETFs, where higher real returns have made gold a less attractive asset for the investment community. However, weak investment demand was offset by strong central bank buying.
We are moderately optimistic about gold through 2024, with the assumption that the US Federal Reserve will begin easing monetary policy throughout 2024.
Degree of geopolitical tension. We expect politics to play a significant role in 2024. The US presidential election, the Israel-Hamas and Russia-Ukraine wars, and ongoing competition between the US and China could have a global impact on markets. Policy decisions on large and unfunded fiscal spending pose both positive and negative risks to the underlying economic outlook. Investing in times of war and geopolitical uncertainty can be challenging, and investors need to prepare for the volatility ahead. We believe that allocating investments across different asset classes and geographies should be most investors' first line of defense against potential market turbulence. However, investors can also further help protect portfolios from specific risks through defensive structured investments, alternative assets or gold positions.
Central banks will continue to buy gold. Events in 2022 have put many central banks on alert, with the Federal Reserve and G7 central banks freezing Russia's foreign exchange reserves. Many Central Banks have realized that G7 currencies may have undue influence. In search of an alternative, gold is becoming one of the most popular diversification options among central bankers. Between 2019 and October 2022, the PBoC (People's Bank of China) reported no gold purchases. However, since November 2022, the central bank reported buying gold for 11 consecutive months. China has been one of the most active buyers this year. By October 2023, China's gold reserves stood at 2,165 tons, approaching the level of Russia's gold reserves.
However, as a percentage of total foreign exchange (FX) reserves, China's shares are quite low at 4%, while India's is 8%, Russia's is 25%, and the US and Germany's are over 68%. . We believe the People's Bank of China will continue to purchase gold and diversify away from G7 currencies, especially in an era of fragmented geopolitical relations.
The People's Bank of China's monetary policy is likely to be shaped by the government's desire to stimulate the economy and avoid a crisis in the real estate market. One of the government's priorities is to free local authorities from the burden of shadow debt obligations. Centralizing these debts will require the assistance of the People's Bank of China to pump significant amounts of liquidity into the financial system. The central bank will also actively accumulate gold in the process of de-dollarization.
Conclusion.
In 2024, gold remains an attractive asset amid economic uncertainty and geopolitical risks. With changes in the global economy, deflation and an expected rate easing cycle, investors are turning to gold as a hedge against volatility
